Of Privilege, and Municipal Electric Service

Of Privilege, and Municipal Electric Service

You might hope that as both are government—the Minnesota Division of Energy Resources (DER) and municipal electric utilities—that there would be comity—some appreciation for the role each plays in the provision of electric service in the state.

Unfortunately, that does not seem to be the case.

The latest evidence comes in the matter of North Star Electric Cooperative and Warroad Municipal Light & Power. Whereas in past years it would be the state trying to sort out issues between the municipals and cooperatives, now it is the municipals and cooperatives trying to set the regulators straight.

Warroad and North Star in 2013 reached agreement on a service territory transfer. The agreement, it seems, was emailed to a wrong state address, and apparently was never recognized. When the utilities subsequently reviewed their boundaries as part of the state’s effort to digitize the electric service area maps, the error was discovered.

Rather than cleaning up the administrative mess with as little fuss as possible, the DER has urged rejection of the agreement. The city and cooperative have ably expressed the very real practical difficulties of undoing an electric service area agreement. These points—including the fact that the customer will save money with city service—have been covered in the January and February editions of the MMUA Resource newsletter.

Larger questions exist.

Municipal utilities may well be concerned about the thought expressed when the DER asked the city why it was in the public interest for the customer to pay “for the privilege” of receiving electric service from the city.

“Privilege,” in this context, is a poor word choice, at best.

Minnesota electric utility service area law never discusses privilege. It does contain, inherently, an obligation to serve. That obligation extends to every customer in a utility’s service territory. As part of the 1974 legislative deal that led to the establishment of electric service territories (and also to the establishment of the state’s utility regulatory apparatus) municipal utilities insisted upon, and obtained, the right to continue to grow along with the cities they served.

The electric cooperatives testified in support of this provision in the bill.

The DER plays an important role, advocating for the public interest before the Minnesota Public Utilities Commission. Long before it existed, however, cities and municipal electric utilities provided this vital function—a function they still perform.

Customers of municipal utilities are also citizens of those cities. Customers don’t have a privilege of being served by a municipal utility. They receive a benefit, or, depending on circumstances, carry a burden.

The DER misses this point; the local policymaker should not ignore it. Municipal electric ratepayers are, in the vast majority of instances, also property taxpayers. The implications of this fact were best described by Judge Jack Davies in his dissent of a 1991 service territory decision. Davies, a legislator when the service territory law was adopted, noted:

“Governance in a city with a municipal utility is complicated by the relationship between local property tax income and the financial returns from and burden of its municipal power utility. One of the reasons, certainly, that the legislature permitted municipalities to extend service to annexed areas was to permit it to keep all residents on an equal basis as both taxpayers and utility customers. Were a portion of the community to be left out of the benefit—or burden—of local power rates, political problems concerning rate setting and investment decisions could result. These are problems the legislative buy-out authority was designed to avoid.”

If the price of acquiring service areas becomes too high, Davies warned, cities would be tempted to leave new portions of their city unserved by the municipal utility. The consequence, he said, would be “a divided community and a potentially unhealthy political climate.”

A local government levying a tax on its citizens has an obligation to treat those citizens equally. Most municipal utilities transfer a portion of their “income” for the year to the city general fund. This directly reduces local property taxes. A city resident served by a utility other than the city, in effect, is subsidized by the municipal utility customers—a subsidy that ought not exist.

It is my experience that a municipal utility will do everything in its power to not run afoul of state regulators. Is it too much to ask that state regulators, in this case the DER, respect the municipal utilities?